The Miners

[Storm]

I sold a small very short term EDV position and picked up a few shares of GDXJ and PMPIX in my VP today.

I'm obviously assuming that we are still in a longer term gold bull market.  If that assumption is correct, I think the miners represent great speculations.

Adam1226 --  I'm not using any particular strategy other than that I confine what I consider to be the most speculative holdings in my VP to 20% or less.  Sometimes I will hedge a little with put options or put in tight trailing stop orders when I want to lighten up, but I'm not currently hedged in any significant way.  The miners currently represent about 15% of my VP.  If they start to crowd 20% I will lighten up a little.  If the miner weakness continues and I don't change my gold bull market assumption, I'll probably continue nibbling.  Miners could peak even after a bullion peak.

Good day to buy - GDX got hammered down over 6% yesterday.  Just a week ago GDX was almost $10 more per share than it is now.  Unfortunately GDX is still lagging the underlying metal's annual returns by a significant amount.  I guess that's as good of a buy indicator as you're likely to get.

[Storm]

I closed out my GDX position at 1 year and 2 days with about a 1% loss.  It's sad to see what gold has done in the last year compared to mining stocks.  Personally this is the first actual loss I have realized investing in over 10 years.

Not that I'm a fan of Keynes, but this quote comes to mind:  "The market can stay irrational longer than you can stay solvent."

And no, it's not that I'm insolvent, this was not purchased on margin, it's just that to have $10K VP money tied up for 1 year with negative returns is a huge opportunity cost.  And the market is still irrational about gold stocks, so I'm going to quit tilting at windmills and try out the PP options plan I've been working on in the other thread with Adam.

[AdamA]

I heard Ian McAvity (one of the senior trustees of GTU) say in an interview that he believes that reason the miners haven't done as well as one might expect is because of GLD.

He thinks that money that would have historically gone to buy mining stocks is going into this ETF. 

Opinions?

[moda0306]

I tend to agree.  I think ETF's, right or wrong, have made owning gold within brokerage & retirement accounts very easy, where as, at least for me, going through all the physical rigamaroll is a bit scary (is this gold? Is it weighed right?  Where do I store it?  How do I sell it?), though I understand why others feel exactly opposite.

[murphy_p_t]

Adam,

in case you didn't see it, this thread might shed some light on your query.

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=4

i suspect that McIvity's stated reason is too simplistic.

There are likely many factors:
-speculator vs investor (ie equity buyer vs gold holder)
-mass psychology
-no counter-party risk with bullion (which is money) (btw...etf holders may find out that GLD etc has plenty of counter-party risk)
-miners have enterprise risk...mine nationalization, new taxes, strikes, floods, hedging by miner, poor management...

[Reub]

From the Hussman Funds Weekly Market Comment:

" Moreover, gold equities are near record lows relative  to the metal, and combined with other factors, we continue to gauge the Market Climate in precious metals shares as very positive."

[Wonk]

I heard Ian McAvity (one of the senior trustees of GTU) say in an interview that he believes that reason the miners haven't done as well as one might expect is because of GLD.

He thinks that money that would have historically gone to buy mining stocks is going into this ETF.   

Opinions?

Miners--like all stocks--need to be increasingly popular to drive PE expansion.  Historically gold has outperformed the miners initially until gaudy earnings over a year or two force attention back to the sector.  Major gold producers were hamstrung by their hedge books for the better part of the 00-10 decade.  Now that those hedges are removed, we should see more plush earnings reports.  I wouldn't be surprised if we see more PE compression though, until lift off.  Miner fireworks have been reserved for the end of secular bull markets.  See 1934 & 1981.

[MediumTex]

Anyone have any thoughts on the miners right now?

It is surprising how low they have gone.

[AdamA]

Anyone have any thoughts on the miners right now?

It is surprising how low they have gone.

I wonder if the miners might turn out to be a disappointment over the next 5-10 years.

It seems to me that an awful lot of investors are waiting for a rally, based on what they feel to be good fundamentals.

How should mining stocks be expected to perform if we are in a deflationary period right now?  Is there any reason they should be expected to do any better than the rest of the stock market?

[smurff]

What has happened with mining shares--or "hasn't" happened in this case--is an example the market doing its own thing and it shows the failure of some predictions.  I remember years ago it was said that gold share prices should go up by two to ten times as much as the gold bullion price.  That may have happened in the 1970s, but not yet so far in the 2010s.

Maybe next year.

Supposedly the availability of gold ETFs has skimmed those speculators who might have put their money into shares because physical gold was too unwieldy.  Now they can directly go long or short in a gold ETF, without the worry about the volatility, financial soundness, etc.. of the companies behind the shares, many of which are small and exploratory.  Of course, with gold ETFs, there are other issues, but I guess overall it's easier to accept those issues than the issues with small gold exploration companies.

Meanwhile, I like the agnostic approach of the HBPP.

[murphy_p_t]

I'm skeptical about attributing the ETFs as the reason for the shares under-performance. It seems that if the market was largely small-time Scottraders, this thesis would be stronger. But are the commercial traders/bank/hedge funds/central bankers making their decision on exposure to gold based on the availability of an ETF? Aren't the big boys the dominant force in the gold market? If so, I would think they will use what-ever means to gain gold exposure best suits their objectives...and I doubt they would hesitate to get the metal directly if they thought that's what their objective required.

Can anyone point to corroborating data, pro or con?

My hypothesis (or someone I've read...probably @ KingWorldNews) is that "investors" wish to eliminate counter-party risk, so they want direct ownership of the metal, which is the ultimate form of money to maintain purchasing power & store of value. Equities don't offer this, for many reasons, including: (1) shares can be diluted; (2) geographic risk (increased taxes on operation); (3) enterprise risk. At the end of the day, equities are a risk asset, where metal is not.

[stone]

Is there less gold there to be mined now than was the case in 1934 or 1980? Think how much labour and oil has to be expended for each ounce of newly mined gold in 2011. In the California gold rush, 25lb nuggets were just sitting there to be picked off the ground. If spending $xbn on digging a mine isn't going to get you much gold then it doesn't make sense to do it. In principle there is a finite amount of gold in the Earths crust. Imagine the gold bull market continues for ever, once every last speck of gold has been extracted, gold stocks will have zero value irrespective of the value of gold. Aren't we now part of the way along that curve?

[l82start]

i took a underground tour of a California gold mine not to long ago and they were talking about starting up again, the mine was one of the gold rush era boom mines and has been inactive (tourist attraction only) for quite a few years..  i believe they said that California still has many times the amount of gold that was pulled out in the gold rush but the cost of getting to it keeps them from mining, unless the price of gold is high enough to make a profit doing so..

[Wonk]

It is surprising how low they have gone.

This one (so far) is nothing compared to the selloff in 2008 (-70%) or the one from 1975-1977 (-65-70%).  Majors have only sold off about 20% from recent highs.  Violent corrections are in fact more norm than exception.  Take a look at the last major bull market from 1965-1981:



No one can tell how deep these corrections will go, so I'd prefer to buy all the way through rather than try to pick a bottom.  It's looking eerily similar to 2008 out there, so we could have one foot dangling off the cliff at the moment.  What's interesting is that historically the final move in gold mining shares happens 6-12 months after a major parabola in gold prices.  With BGMI, it's 1980-1981.  Look at a chart of Homestake from 1932-1934 and you'll see the same.  It all comes down to income and earnings multiples.

I can't argue with the last 2 years of income statements from Barrick.  50-100% growth in net income after hedges are removed is quite compelling.  You can only increase net income 50-100% so many times before someone takes notice and places a bid.  I suppose the majority of investors are bearish on gold's future at the moment and are subsequently liquidating share prices.  My guess is we won't see a major high in gold prices for another 3-5 years and  for the miners, 4-6 years.

[FarmerD]

I bought the Vanguard Precious Metals and Mining fund (VGPMX) with some of my IRA funds 6 months ago.  Checked this morning and I see VGPMX is up 9.6% (the biggest gaining Vanguard fund so far this year) so far while GDX is up only 1.4%.  Curious to see such a wide discrepancy.  I realize VGPMX is only about 50% in gold miners and the rest in industrial metals/minerals, but in a deleveraging world why would the stocks of these companies be surging so much.  Projected prosperity I guess?  Seems strange to me. 

[dualstow]

I bought the Vanguard Precious Metals and Mining fund (VGPMX) with some of my IRA funds 6 months ago.  Checked this morning and I see VGPMX is up 9.6% (the biggest gaining Vanguard fund so far this year) so far while GDX is up only 1.4%. 

In the short term, at least, it looks like you really bought the fund at the right time. Down 21.7% year-to-date if you had checked on 12/31/2011, just a bit earlier. (No idea why it doesn't track the same as GDX).

[AdamA]

Seems strange to me. 

Seems strange to me too.

I don't even understand why precious metals miners would be expected to do well in a deleveraging.

[MediumTex]

Wonk,

I'm ready for your updated analysis of the miners.

I assume it's a good time to buy, but I wanted to see what your thoughts are.

Uncanny.  I had my buy order for GDXJ filled with 9 seconds left in the session today.  I was coming here to put it out in public and saw your post.  We're on the same wavelength.  I'm going out to buy some carpet cleaning materials.   ;D

I love the miners here.  One metric I keep my eye on is the XAU:GOLD ratio.  It hit 7.26 today, which is really cheap.  The higher it goes, the cheaper the miners are in relation to gold.  Anything over 4 has historically been a good time to buy miners.  John Hussman had some nice commentary explaining the ratio a while back.  Here's the article:

http://www.hussmanfunds.com/wmc/wmc050502.htm

If you're short on time, here's the juicy section:

To put some historical context on this measure, since 1974, the Gold/XAU ratio has been greater than 5.0 about 15% of the time. When the ratio has been this high, the XAU has followed with annualized gains of 89.6%, on average – a figure that remains high even if the data is split into multiple samples. When the ratio has been greater than 4.0, the XAU has followed with average annualized gains of 27.4% (though the finer profile of returns has been sensitive to other conditions such as interest rates, economic trends, and inflation). In contrast, when the ratio has been less than 3.0 (meaning that the gold stocks are very elevated relative to the actual metal), the XAU has declined at an annualized rate of -36.6%, on average.

The ratio has been range-bound in the 6-7 area for over a year.  This spike might be a blip on the radar or it could be signaling a waterfall decline in the mining equities like we witnessed in 2008, where the ratio hit 11.5.  That was probably a 5 or 6 standard deviation event, so I doubt we'd see that again.  But anything is possible.  In fact, if we hit those levels again, I will attempt to sell everything I have, including my wife's cat, to buy miners.  Back then, you could buy some miners for the cash they had in the bank.  It was insane.  I missed that as I was mostly in the orthodox PP back then, but if it happens again I'll back up the truck in a heartbeat.

The basic point is I really love the miners right now.  I think they were on the cheaper side before this sell-off, but I'm starting to salivate.  There could be a heckuva lot of pain ahead for the mining sector in the near future, but I'll be pinching my nose and buying all the way down if it gets that bad again.

The Gold/XAU ratio is at 9.86 right now. 

I wonder if Wonk's wife's cat is feeling nervous.

[MediumTex]

Gold/XAU ratio at 10.20!

Wow.

Wonk's wife's cat should go into hiding.

[BugMan]

MY VP just went 100% long mining stocks.

[dualstow]

MY VP just went 100% long mining stocks.

Which companies are your favorites?
Or did you just buy a huge basket with even amounts.

[murphy_p_t]

Bugman, how did you decide that now is the time to go all in?

[Alanw]

Does this mean The Miners are about to move much higher to catch up to the price of gold?

Or is the price of gold going to move much lower to catch up to The Miners?

BTW, I have held a position in GDX for several months and watched it increase 10% and then drop 20% from the high to leave me down 10% at the moment. I am going to sit tight and see what happens.  

[AdamA]

Does this mean The Miners are about to move much higher to catch up to the price of gold?

Or is the price of gold going to move much lower to catch up to The Miners?

Or that the ratio will continue to rise for who knows how long?

[MediumTex]

Does this mean The Miners are about to move much higher to catch up to the price of gold?

Or is the price of gold going to move much lower to catch up to The Miners?

Or that the ratio will continue to rise for who knows how long?

I believe we are currently in a a historically high gold/XAU ratio situation, so I doubt that the ratio will rise much more (though anything is possible).

I think that what is more likely is that the miners will either rise or gold will fall.